Personal Retirement Funds

[ms6073]

Remember the power of compounded money....20% interest on a credit card versus 8% in your 401k is a no brainer. But paying off a 5.5% mortgage early when you could earn 8% in the market is just stupid...especially when you factor in the tax savings of the deductions from your mortgage interest expense.

Ah yes - new math confuses me when people think that paying 5.5% to the bank while earning a subtle rebate on money's we already ponied up to the government is a good deal. So going gonzo and paying off a 15-year mortgage in 5-7 year so or a 30-year mortgage in 10-15 years then paying yourself instead of the bank for the balance of that time is stupid?

 

[BluDevAv8r]

Ah yes - new math confuses me when people think that paying 5.5% to the bank while earning a subtle rebate on money's we already ponied up to the government is a good deal. So going gonzo and paying off a 15-year mortgage in 5-7 year so or a 30-year mortgage in 10-15 years then paying yourself instead of the bank for the balance of that time is stupid?

I could make a good argument for making just your mortgage payments only (on schedule) versus pre-paying (to knock a few years off) but I'd rather take this discussion a step further by asking you one simple question. Your answer (and I am curious if it is consistent with what you are saying above) will speak volumes about your investment strategy as well as level of risk tolerance.

If I gave you $100,000 in cash to buy a $100,000 home, would you pay for it in cash or take out a mortgage?

-Neal

 

[kingairyahoo]

*gets the popcorn out and passes it around*

 

[smellthejeta]

I could make a good argument for making just your mortgage payments only (on schedule) versus pre-paying (to knock a few years off) but I'd rather take this discussion a step further by asking you one simple question. Your answer (and I am curious if it is consistent with what you are saying above) will speak volumes about your investment strategy as well as level of risk tolerance.

If I gave you $100,000 in cash to buy a $100,000 home, would you pay for it in cash or take out a mortgage?

-Neal

Neal, I know this wasn't directed at me, but the proper answers depends on your credit rating (ie what rate you can get your mortgage for) and what your other investment options are. I'd say put 20% down on the house so you can avoid the PMI, and then if you can beat beat 8% on the mortgage, take the mortgage and invest the money (or pay off higher interest debt). But if your interest rate is too high, pay the house in cash. Is it safe to say that if you have to pay PMI, you can't afford the house?

I *still* don't understand the logic (or maybe it was never presented) that says if your rate of return in the investment market beats the rate at which you have student loans or mortgage, that you should pay your low interest debt at the expense of higher interest returns. In other words, if I have debt that I pay four cents on the dollar to maintain, but that same dollar earns me six or seven cents in the market, why should I take that dollar out of the market and put it towards debt? In effect, I am losing two or three cents on the dollar, notwithstanding any tax deductions I can make for having a mortgage or student loan debt.

 

[Checks]

dangerkitty,

you are a real jerkoff. pilotyip may have some flawed argument about not going to college but that is no reason to attack the guy. So what if you think you are some great success?
If I wanted to attack you I would mention the fact that you are one of two things:
1. Single with no family life to speak of. You will retire a lonely old man
2. Married but your wife and kids hate you because you focus exclusively on work and doubling your income every 5 years. The wife will start dorking the gardener and leave you and take half or your 100K salary

Try being more well rounded dude

 

[Swaayze]

Oh goody, back to the personal insults.......

I have no financial credentials, but personal finance is a hobby. There are plenty of justfications out there for however you prefer to handle your affairs. There is more than one way to skin a Kitty.

DK is clearly a Dave Ramsey wonk, and that's fine. I listen to Dave a lot and buy into most of what he says. I certainly appreciate his Christian take on issues, but......Dave is a little overboard on some of his recommendations (ie, imo, paying smallest debt before most expensive is for weak minded consumers, which is why it works for most people).

But......IMO you're better off investing up to the company match in a 401k prior to paying off low interest debt. Fact is you can always get to the 401k money via loan or early (penalized) withdrawl if necessary. Also realize that contributions to a Roth IRA can be withdrawn tax and penalty free after 5 years (serving as a makeshift emergency fund).

We can only make decisions based on what we know to be true today, so right now you should plan as if the Roth earnings will be tax free and the tax rates currently in effect will stay that way.

Being debt free (mortgage notwithstanding) is the only saving grace I have right now given my career (or lack thereof). If it weren't for that we'd be in a world of hurt.



And BenderGonzales, you should be able to change venues for an IRA. Just call the companies involved, tell them what you want to do, and ask for the appropriate forms. You may have to liquidate the holdings (convert to cash) within the IRA before switching trustees, but that's no big deal.

 

[PC800]

You may have to liquidate the holdings (convert to cash) within the IRA before switching trustees, but that's no big deal.

One caveat-- be sure the funds transfer is direct from one trustee to the other. If the money passes through your hands on the way to the new trustee, it may initially be viewed by the IRS as an early distribution. It's not (assuming you get it to the new trustee within the specified time frame), but jumping through the hoops to prove that to the IRS is a PITA (BTDT).

 

[BluDevAv8r]

Neal, I know this wasn't directed at me, but the proper answers depends on your credit rating (ie what rate you can get your mortgage for) and what your other investment options are. I'd say put 20% down on the house so you can avoid the PMI, and then if you can beat beat 8% on the mortgage, take the mortgage and invest the money (or pay off higher interest debt). But if your interest rate is too high, pay the house in cash. Is it safe to say that if you have to pay PMI, you can't afford the house?

I still want to see what MS6073 has to say before commenting on your post. If you want to take it to PM's, shoot me one and we can continue the discussion.

I *still* don't understand the logic (or maybe it was never presented) that says if your rate of return in the investment market beats the rate at which you have student loans or mortgage, that you should pay your low interest debt at the expense of higher interest returns. In other words, if I have debt that I pay four cents on the dollar to maintain, but that same dollar earns me six or seven cents in the market, why should I take that dollar out of the market and put it towards debt? In effect, I am losing two or three cents on the dollar, notwithstanding any tax deductions I can make for having a mortgage or student loan debt.

I've always heard the argument stated exactly as you state it. If you can earn a higher return in the market (or some other investment), there is no need to retire debt early, especially if it is an appreciating asset (like real estate hopefully). Depreciating assets such as cars present different assumptions of course, such as cost of depreciation, etc.

-Neal

 

[RockyMnt1]

Back to the Long Term Care issue

Just got my LTC policy and I wanted to clear a few points that a previous poster spouted as fact:

1) Skilled nursing care is covered in the policy

2) Rehabilitative (and even curing) services are covered

No, I am not in New York. Policy is a group policy from Met Life.

You just can't believe everything that on the internet!!!

 

[PC800]

Just got my LTC policy and I wanted to clear a few points that a previous poster spouted as fact:

1) Skilled nursing care is covered in the policy

2) Rehabilitative (and even curing) services are covered

No, I am not in New York. Policy is a group policy from Met Life.

You just can't believe everything that on the internet!!!

Thanks for the data point, that matches my experience. I'm guessing that DangerKitty is confused about the difference between "skilled nursing care" (which is covered by LTC policies) and "acute nursing care" (which is covered by medical policies).

You're right that you can't believe everything on the internet, but often there are clues that help to sort things out: when the poster can do no better than, "Again you are just plain stupid..." and "Why you can't get that through your thick head..." to make his points, you can be pretty sure he doesn't know what he's talking about!

 

[GEXDriver]

The best thing to do is to talk an investment advisor. And GV are you sure about those numbers? The goverment is only going to tax the amount you take out. Thats why its better to start taking money out earlier so you get a better tax bracket.

It doesn't appear that you understood GV's post. His numbers are spot on and I like his idea of buying property, depreciating it to zero and then doing a like-kind exchange.

 

[Dangerkitty]

Thanks for the data point, that matches my experience. I'm guessing that DangerKitty is confused about the difference between "skilled nursing care" (which is covered by LTC policies) and "acute nursing care" (which is covered by medical policies).

You're right that you can't believe everything on the internet, but often there are clues that help to sort things out: when the poster can do no better than, "Again you are just plain stupid..." and "Why you can't get that through your thick head..." to make his points, you can be pretty sure he doesn't know what he's talking about!

PC800,

Sorry it has been awhile since I posted but I have been up to my eyeballs in work. Flying and insurance.

It has been just over 2 and 1/2 years since I have sold a LTC policy. I will be calling my old agency on Monday but I am guessing a few things have happened since I was actively selling LTC policies.

Back when I was very active in the LTC industry all policies refered to nursing care as two seperate types:

1. Skilled nursing care refered to care when you were in the hospital and your condition was going to improve or improving. Thus you didn't have a condition that you were going to have to live with for the rest of your life.

2. Unskilled nursing care referred to the care that was paid for by a LTC policy ie Nursing Home Care, home health care and the like. The term "unskilled nursing" care had NOTHING to do with the quality of care you received. It only meant was the condition the patient had was never going to go away. Like Alzheimers, or severe arthritus. Any condition that you were going to go to your grave with would fall under the "unskilled nursing" category.

As you can see this caused A LOT of confusion with people when it came to buying a LTC policy. For example many people think Medicare pays for LTC when nothing could be further from the truth. Why do they believe that? Because there is a clause in Medicare which states that they will pay a limited amount of skilled nursing care. When they are referring to this Medicare is talking about rehab care, NOT Long Term Care.

I am guessing with all the confusion that the LTC companies decided to change the terminology under the LTC policies. In doing so they probably hoped to take away some of the confusion that the skilled vs unskilled care caused. In doing so they also probably started this whole debate to begin with since I have gotten into new insurance lines and dont deal with LTC all that much anymore.

 

[PC800]

I am guessing with all the confusion that the LTC companies decided to change the terminology under the LTC policies. In doing so they probably hoped to take away some of the confusion that the skilled vs unskilled care caused. In doing so they also probably started this whole debate to begin with since I have gotten into new insurance lines and dont deal with LTC all that much anymore.

Now, that was a calm and reasonable response. A simple, "Gee, that's not the way I understand it, things may have changed since I've actively sold LTC policies" would have been so nice earlier in the thread, as opposed to the "Again you are just plain stupid..." and "Why you can't get that through your thick head..." you dished out instead.

You're absolutely right about Medicare and long term care, of course. Many people also confuse Medicare with the state administered Medicaid programs, which do pay for long term care (often in facilities you wouldn't want to leave your dog in)-- but only after you spend down virtually everything you own, so you're poor enough to qualify. Not a good way to go, and avoidable only by death, or accrual of wads of cash-- or purchase of a LTC policy.

 

[PCL_128]

The best thing to do is to talk an investment advisor.

Not if DangerKitty is any indication about what an investment advisor knows. Anyone that tells you to pay off extremely-low-interest debt before getting a guaranteed company match on a 401k shouldn't be advising anyone about their finances.

 

[Swamp Fox]

How much before you would be comfortable with retiring early?

And before you ask, no, I don't have any financial planning credentials. However, I did manage to reach my financial goals and retire, very comfortably, 9 years ago-- at the age of 45.

PC800, that is quite an accomplishment. Congratulations! You must have had a serious plan and the self-discipline to stick to it. Realizing that everyone's needs and circumstances vary, would you mind sharing what goal you set that allowed you to feel confident in retiring at 45? (If this is getting too personal, I apologize in advance.)

I have considered hanging it up early. I need a little more in the kitty, though, if I'm going to be able to afford that new ATG Javelin in my retirement!